Amid intense negotiations over the Build Back Better (BBB) package that the Biden administration wants to make its signature legislative achievement, President Biden has released some limited details of a new, slimmed-down version of his original plan that would nonetheless increase federal spending by up to $1.85 trillion over 10 years. The president proposes paying for this new spending with just under $2 trillion of tax increases and other ‘pay fors’ over 10 years. Unfortunately, the framework fails to answer several crucial questions that will help determine the full impact of BBB on taxpayers, and relies on some budget gimmicks that will ultimately cause the package to increase deficits.
Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) Cliffs
President Biden’s framework claims the CTC is a “tax cut,” and the full refundability will ensure the neediest families will receive the credit “over the long-run.” However, as NTU Foundation has written, refundable tax credits are more akin to spending than tax cuts. While it may be an easier sell politically to claim refundable tax credits are “tax cuts,” there is a difference between true tax relief and transfer payments.
The claim that the CTC will provide relief for families “over the long-run” is also incorrect. As Congressional negotiations progressed, the CTC has gone from a possible permanent extension, to three or four years, and now, to just a one-year extension. Essentially, Democrats are betting that, due to the expected popularity of this credit, Congress will be forced to extend it. However, NTU has warned this budget gimmick hides the true costs of the credit and creates substantial uncertainty for taxpayers. The cost of the annual CTC expansion would eclipse the entire extenders package from December 2020. Also, taxpayers would be left guessing every year whether the CTC would resemble the version in the American Rescue Plan Act (ARPA), the Tax Cuts and Jobs Act (TCJA), or the pre-TCJA version.
The Biden administration touts the expanded EITC as a win for low-wage workers. However, the one-year extension is another gimmick that creates uncertainty for taxpayers and masks the true costs. The EITC consistently has a high improper payment rate, averaging 24.4 percent over five years. This led to an estimated $16 billion in improper payments in 2020. The EITC is complicated for taxpayers to navigate, contributing to the improper payments, and contains a steep marriage penalty. Rather than rush through a gimmicky framework, lawmakers can evaluate holistic changes to the array of overlapping spending programs designed to support low- and moderate-income taxpayers. At the very least, Congress should address the structural flaws of the EITC before attempting to extend the expanded credit.
Affordable Care Act (ACA) Credit Cliffs
The administration plans to make two major expansions to ACA premium tax credits (PTCs), which subsidize individuals’ purchase of private health insurance on the ACA marketplaces. First, the administration would extend the temporary boost to PTCs included in the American Rescue Plan Act for plan years 2021 and 2022. Second, the administration would expand PTC eligibility to the roughly four million individuals in the Medicaid coverage gap -- a dozen or so states that have declined to expand Medicaid to low-income adults.
The Congressional Budget Office (CBO) recently estimated that the combined effect of these provisions would increase deficits by at least $530 billion over a decade. How does the administration cut that number to a quarter of its original size, or $130 billion? By setting up yet another funding cliff.
The new Biden framework does not have details on the timeline of ACA expansion provisions as of this writing, but based on the CBO score it is likely that the first expansion (temporary boosts to PTC value) will be extended for two years, for plan years 2023 and 2024. It is likely that the PTC expansion to Medicaid gap populations will last for three years, from 2022 through 2024.
As noted above, setting up major policy cliffs that affect millions of Americans is a fiscal disaster for taxpayers and a fundamentally dishonest way to approach policymaking. Lawmakers may be hiding the true cost of permanent ACA and Medicaid expansion, at least over a 10-year window, by as much as $400 billion.
Clean Energy Provisions Distort Tax Code and May Benefit Wealthy Households
The framework’s largest spending line-item is $555 billion for “Clean Energy and Climate Investments.” Of this $555 billion, an estimated $320 billion would be used for clean energy tax credits to spur more green energy production and investment. NTU supports tax provisions that allow for the full and immediate recovery of R&D costs and capital expenditures. However, provisions like the investment tax credit and production tax credit provide narrow, distortive benefits to certain companies and industries. As NTUF wrote of such tax credits in 2019:
“Extending them makes little economic sense since they disproportionately benefit politically favored industries and technologies. And yet Congress has extended and expanded them many times. The wind PTC was created in 1992, and almost 30 years later, the credit continues to find a way to avoid the chopping block.”
One of the most concerning components of the plan is a massive expansion of tax credits for electric vehicles (EVs). Biden’s framework provides little detail, but previous iterations of this proposal have allowed for tax credits that can reach up to $12,500 in value and can be utilized by households earning up to $800,000 to purchase SUVs worth up to $69,000. The existing EV tax credit is already primarily utilized by wealthier individuals -- 78 percent of the credits go to households making more than $100,000, according to the Congressional Research Service.
Additionally, this credit is structured to provide more generous benefits to domestically manufactured, union-made vehicles. This would worsen trade relations with our economic allies and help some American workers at the expense of others. As NTU Foundation’s Bryan Riley recently wrote: “The proposed EV-subsidy bill would give preferential treatment to auto workers who belong to unions at the expense of non-union auto workers in Alabama, California, Georgia, Indiana, Kentucky, Mississippi, Missouri, Ohio, South Carolina, Tennessee, Texas, and West Virginia.”
The framework also establishes the “Civilian Climate Corps” with billions in funding across multiple agencies. This new make-work program would enlist 300,000 members, according to information released by the White House. As NTU’s Thomas Aiello recently wrote:
“The intended purpose of the proposed CCC is to train a new American force focused on coastal restoration, reinvigorating national park trails, restoring wildlife preserves, and help with climate disaster recovery, among other jobs. This money is duplicative, as the National Park Service, Bureau of Land Management, Fish and Wildlife Service, and Tribal agencies already receive billions of dollars to do exactly what the CCC aims to do. The CCC would just become another wasteful, overlapping program that already plagues the federal budget.”
Child Care and Preschool Subsidies May Be Poorly Targeted
The Biden framework also allocates $400 billion for expanded child care and universal pre-K. Specifically, the framework would limit child care costs for families to no more than 7 percent of family income for those making up to 250 percent of state median income. For residents that choose to live in expensive areas of the country, this childcare subsidy could be significant, especially for residents that have an income much higher than the median income. The framework only funds this program for six years, meaning it would have to be extended, thus likely increasing the overall cost of the program if it becomes an annual extender. The creation of a new child care entitlement program would also increase the role of government in people’s everyday lives, essentially having a cradle-to-grave welfare state. Government subsidies for child care are not likely to solve the underlying problems of the cost of child care.
Housing Funding is an Expensive Solution to Problems With More Affordable Alternatives
The updated “Build Back Better” framework contains significant spending for expanding access to affordable housing. Specifically, the $150 billion appropriation would be used for capital improvements to the existing public housing stock, construction of new units, and down-payment assistance for first time homebuyers. This housing spending level is about half of the amount passed out of the House Financial Services Committee back in September. At the time, we wrote regarding our concerns with the housing provisions, and those concerns are still pertinent today. Providing more taxpayer money to build public housing units is a misguided approach that is likely to have no measurable impact on monthly rental prices. Additionally, if the history of public housing is any guide, these funds are likely to increase the reliance on government services without making a significant dent into poverty rates. Instead, it will leave taxpayers to foot the cost of this significant new spending.
Further, there is likely to be funding for a new federal program to encourage local zoning reform - which totaled $4.5 billion in the Committee passed bill. This new program is designed to provide planning and implementation grants to help communities improve housing strategies, reform zoning, streamline local regulations, and address sustainability and fair housing. However, there are better solutions that would encourage land use reforms without costing taxpayers anything.
IRS “Investment” Estimate Lacks Crucial Information
The largest single pay-for in the new Biden framework is “IRS Investments to Close the Tax Gap,” which the administration estimates will bring in $400 billion over 10 years. This estimate may come from a September 2021 memo written by Treasury Department officials, which found that “[c]onservatively, about $400 billion of additional revenue can be collected (incorporating both the direct and indirect effects of enforcement investment) from the President’s proposals, net of the $80 billion investment.”
There is every reason to believe the administration is overestimating by literally hundreds of billions of dollars.
The Congressional Budget Office (CBO) has estimated that an $80 billion budget boost to the IRS would net the government $120 billion in increased revenue over a decade. The administration has conjured up an estimate more than three times that number, with a direct net effect ($320 billion) that is 2.7 times CBO’s estimate and an indirect gross effect ($160 billion) that is based on four academic studies, two of which are based on revenue collection activities in foreign countries and one of which is based on deterrent effects on low-income (rather than high-income) U.S. taxpayers. This methodology seems extremely flawed at best, and Congress should demand a second opinion from CBO and the Joint Committee on Taxation (JCT). Congress should also ask for a distributional analysis of the impacts of IRS enforcement, so that lawmakers can see how much low- and middle-income taxpayers may be caught up in increased IRS enforcement activities.
If the CBO score is closer to what CBO has already estimated than the administration’s possibly rosy projections, then lawmakers will have a $280 billion hole to fill in their legislation.
Rebate Rule Pay For Is a Gimmick
Unfortunately, NTU and NTU Foundation have had to warn policymakers that delaying or repealing an already-delayed and never-implemented regulation should not count as real budget “savings” that will pay for new government spending. As we wrote months ago:
“This rule has never been implemented, and there’s no clear indication that the Biden administration would have followed through on implementing the regulation even after their one-year delay. And even if the Biden administration had implemented the rule, there’s little clarity as to whether the rebate rule would have actually cost federal taxpayers over $177 billion over the decade.”
Now, repealing the rebate rule might cover -- at least on paper -- nearly eight percent of the entire BBB package. This is an irresponsible budget gimmick that should be completely scrapped from the legislation, and in practice leaves another $145 billion hole for lawmakers to fill in BBB.
International Tax Rules Could Hurt U.S. Companies and Workers
The administration estimates that it can collect $350 billion in additional tax revenue from their changes to international tax rules. This is a significant downward revision from their Green Book estimates, which had changes to the Global Intangible Low-Taxed Income (GILTI) rate, the Foreign Derived Intangible Income (FDII) deduction, and the Base Erosion and Anti-Abuse Tax (BEAT) regime netting the administration nearly $500 billion in tax revenue.
It is unclear how the administration gets to $350 billion in their new framework, especially since the Ways and Means version of international tax reform would only net about $257 billion. It remains to be seen whether or not even the current Ways and Means version of international tax reform can pass both chambers of Congress, much less a larger tax increase being pushed by the administration. If Congress goes with the Ways and Means version instead, they could be leaving another $90 billion hole to fill in BBB.
Revenue will also be limited if the administration delays GILTI implementation, as potentially contemplated in the White House outline. While this would be a positive change given the uncertainties surrounding the global tax agreement, it makes paying for BBB even more difficult.
Book Minimum Tax Is Bad Policy
As NTU wrote earlier this week:
“Headlines about major U.S. corporations paying little to nothing in corporate income taxes in a given year often generate frustration and anger among some lawmakers and advocates.
...These lawmakers and advocates often fail to paint a complete and clear picture explaining why some corporations report large “book” profits but pay nothing in taxes in a given year. There are several ways book and taxable income can differ in a given year for a given company; some differences are temporary and some are permanent.”
A corporate minimum tax would undermine key provisions of the tax code that have long enjoyed bipartisan support, such as allowing businesses to fully and quickly recover the cost of capital investments for tax purposes. This could undermine the ability of U.S. companies to invest in their workers.
We also wrote:
“Beyond the economic impacts, the book minimum tax would make the U.S. an outlier among its economic peers, might not solve the underlying problem of companies using ‘aggressive’ accounting positions to reduce tax liability, and would outsource tax policy to a non-profit, privately-run organization (the Financial Accounting Standards Board) that consists of unelected officials.”
The administration estimates it can raise $325 billion from this proposal. However, an earlier (albeit different) version of the administration’s proposal was only projected to bring in around $150 billion. And Sen. Angus King (I-ME) -- a sponsor of the new corporate minimum tax proposal in Congress -- has estimated a range of revenue increases from $300 billion to $400 billion, the administration’s estimate deserves more scrutiny.
Stock Buybacks Tax Lacks Details, Could Harm Investors
As our colleagues at NTU Foundation have written in the past, stock buybacks are an important tool for companies to preserve liquidity while increasing shareholder value. The proposed one percent excise tax on buybacks is poor tax policy, in that it would attempt to bias corporate activity based on the whims of politicians. But more importantly, it could harm the economic well-being of millions of Americans by reducing the value of their investments.
As NTUF’s Andrew Wilford wrote of buybacks recently:
“...the impact they have on stock values makes a significant difference in investment accounts held by a great many Americans. The latest Federal Reserve Survey of Consumer Finances (from 2019) shows that 53 percent of Americans hold publicly-traded stock in some form, with a median value of $40,000 in holdings. That roughly corresponds to the percentage of Americans who paid taxes that same year, 56 percent of Americans.”
Additionally, the $125 billion revenue estimate from a one percent excise tax deserves further scrutiny. An earlier proposal from Sens. Ron Wyden (D-OR) and Sherrod Brown (D-OH) suggested a two percent excise tax would yield $200 billion in revenue. That estimate, as Wilford noted, appeared “to be the result of a simplistic calculation taking two percent of the $5.3 trillion corporations have spent on buybacks over the last decade.” However, excise taxes are often accompanied by behavioral changes that reduce the frequency of a taxed activity and thus, the accompanying revenue.
 Under Subtitle I of the JCT score, we add provisions C.1, C.3, C.4, C.5, C.6, C.7, and D to achieve a net score of $257 billion over 10 years.